Macro Factors and the Term Structure of Interest Rates

Hans Dewachter and Marco Lyrio ()

International Economics Working Papers Series from Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics

Abstract: This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modelling consistently long-run inflation expectations simultaneously with the term structure. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and Tinsley (2001). Application to the U.S. economy shows the importance of long-run inflation expectations in the modelling of long-term bonds. The paper also provides a macroeconomic interpretation for the factors found in a latent factor model of the term structure. More specifically, we find that the standard "level" factor is highly correlated to long-run inflation expectations, the "slope" factor captures temporary business cycle conditions, while the "curvature" factor represents a clear independent monetary policy factor.

Keywords: essentially affine term structure model; macroeconomic factors; long-run market expectations; monetary policy rule (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2003-04
New Economics Papers: this item is included in nep-fin, nep-mac and nep-rmg
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Citations: View citations in EconPapers (44)

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Related works:
Journal Article: Macro Factors and the Term Structure of Interest Rates (2006)
Working Paper: Macro factors and the term structure of interest rates (2004)
Working Paper: Macro factors and the Term Structure of Interest Rates (2003)
Working Paper: Macro Factors and the Term Structure of Interest Rates (2003)
Working Paper: Macro Factors and the Term Structure of Interest Rates (2002)
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